Getting Your Shit Together for 2016
The Importance of Cash Flow
The beginning of a new year symbolizes a fresh new start — for entrepreneurs, this is the perfect time to get your shit together. Building a product and growing a company is not for everyone; entrepreneurship is an incredibly difficult and stressful, yet rewarding journey. But one of the biggest lessons I’ve learned while building and running businesses is the importance of cash flow.
Here are my top lessons I’ve learned from my entrepreneurial journey:
Revenue and net income are important, but cash flow is critical.
If you want to operate your business successfully, you must have money flowing (or coming) in — more money flowing in than flowing out, of course. While these statements may seem obvious, I’ve seen too many entrepreneurs get blindsided by all their expenses that accumulated over the year, and the unmet expectations that money is anticipated to come in.
The way that money is coming in can vary. Ideally, it’s from paying customers paying for your products. It can also be in the form of investments coming in from third party investors, government grants, shareholder loans, bank loans, etc. — that money coming in, that cash flow is the lifeblood of your company. It is what will keep your business alive so you can fight another day to keep pushing and building your product. If you don’t have proper cash flow, you are hindering your chances of success.
Numbers make the world go round.
Most people don’t like numbers — it’s easy to forget about or push away, but you must understand that when you’re running a business, the numbers, and data sets that are produced are essential for identifying red flags that may have a critical impact on your business.
If numbers are not your strong suit, look for help. Look for ways to simplify the process so you can understand it. It does not have to be complicated, and there are lots of templates out there that you can use. Just remember, setting something up is better than nothing. Sweeping it underneath the rug and hoping that it’ll go away, or holding off until you think there’s a better time to work your numbers out is false. Cash flow is critical from day one — but even more so, before day one, because it helps you predict what your path should look like for your company.
Tracking your numbers can identify key red flags within your business.
The first red flag, however, is if you’re not even tracking expenses from the very beginning. It’s easy to track money coming in because typically, the sources and amount of money coming in is not as much as money going out. Money going out goes out in so many different ways — a little credit card bill here — signing up for an online service there — and next thing you know, you have five or six different sources of expenses for your startup. What you need to do is log all your expenses and verify that you’re able to sustain yourself and your business.
Even if you don’t have paying customers, or third-party investors, you’re going to be paying for your startup expenses somehow, so tracking that information — whether it’s on a full-scale accounting system or something lightweight like Freshbooks, there are a multitude of tools that you can use. You can even go as simple as using an Excel template. It doesn’t have to be costly, or overly complicated. You just need to track it.
Your most valuable investor for your business is a paying customer.
Not only can that customer provide you with funding (in the form of revenue), but they are your primary source of feedback and indications of what the future may hold for your company. They can also help you determine what direction you want to take your company in as the future unfolds. Your customers are incredibly valuable to your business, and you can see it based on tracking your cash flow.
Take the time to properly lay out your cash flow and expenses. With the beauty of technology today and the various tools that are out there that are getting easier and easier to use — there’s no excuse to not learn how to manage your finances for your business. And just like how we in the startup world preach to embrace failure, learn to embrace numbers.
Stay tuned for my next post on ‘How to Track How Much You’re Worth — Even If You Aren’t Paying Yourself’.